In today's Finshots we see what is ailing Pakistan's economy

The Story

Pakistan is in a torrid mess.

The country barely has anything left in its forex reserves. Just $3 billion that’ll cover less than 3 weeks' worth of imports. Its inflation is through the roof at over 24%. The Pakistani rupee is in a free fall and has plummeted by 32% against the US dollar during the last 12 months.

Things look quite dire for our neighbour.

And it’s not a problem that has crept up out of the blue. It’s a lot of little things adding up over the years. Some of it due to political greed and folly.

For instance, look back to a couple of years before 2018. The party in power then artificially kept the Pakistani rupee’s value strong against the US dollar. Leading up to the election, they wanted to thump their chests and claim that the economy was stable. But they actually spent $7 billion on this effort. And the strong currency turned out to be a bane.

See, when a currency is strong, trading partners think twice before they buy your goods and services. Because they might feel like they’re shelling out too much money. The value they’re able to squeeze out of their money drops. And it hurts your exports.

On the other hand, imports could rise. Simply because the same amount of money can buy the same amount of stuff year after year. Importing stuff isn’t affected by inflation. So foreign products are easily accessible. And domestic alternatives are hurt.

This situation meant that exports suffered and imports rose. From 2015 to 2018, the exports dropped from 10.60% to 8.50% of GDP. And on the flip side, imports rose from 17% to 19% of GDP.

And more recently, there was a policy decision regarding oil.

See, as oil prices climbed in 2022, the rest of the world increased petrol prices for their citizens. And even the Pakistani authorities made the recommendation that petrol prices should be increased. But Imran Khan decided that he would cut oil prices instead. He wanted to appease voters. But this came at a massive cost of a 250 billion Pakistani rupee subsidy. It was money that Pakistan didn’t have.

Even economic policies that were supposed to help the country didn’t have the intended effect,

Such as China’s Belt Road Initiative programme. It lent money to countries like Pakistan to build ports and infrastructure. And Pakistan bought into the scheme too. It felt this was a great way to improve its infrastructure. So it ended up borrowing over $30 billion. But Pakistan wasn’t really benefitting because China brought its own labour and materials. It didn’t help grow the local economy.

In 2019, the US even sounded a warning to Pakistan. They said that the loans had a lot of strings attached. And that Pakistan would face the brunt of it in 4 years or so when repayment would be due.

And the final nail in the coffin was a natural disaster.

In mid-2022, the country was ravaged by floods. Crops were destroyed. Take for instance cotton. Pakistan is the fourth largest cotton supplier in the world and textiles contribute to nearly 60% of its exports. Without cotton, the textile industry which employed 10 million people came to an abrupt halt. Export earnings were hit badly.

But it also hurt regular agriculture. In some regions, it completely wiped out wheat which was part of the staple diet of Pakistanis. The country had to import food items that it otherwise was pretty much self-sufficient in. And that affected the economy adversely too. The forex reserves were drained and the deficit soared.

Even the actions of the people of Pakistan aren’t helping its cause either.

For instance, the rich are still importing luxury cars. In the 6 months leading up to January, Pakistan shelled out a massive $1.2 billion for these imports. When it had absolutely nothing in its forex coffers.

There was also the matter of remittances from Pakistanis living in the Middle East and elsewhere. Generally, these inflows are a saving grace in times of stress. When the home currency depreciates, people tend to send a lot more money back home. For instance, when they send $1, they’ll get 250 Pakistani rupees instead of just 200 Pakistani rupees. And such inflows add to the forex reserves of the country. For Pakistan, these remittances contribute to 8.5% of the economy.

But in December 2022, the inflows actually fell to a 31-month low!!!

Why’s that, you ask?

Well, people didn’t care about the economy. Or rather they didn’t think about the economy. They wanted the most bang for their buck. And since formal channels like money transfer agencies and banks took a hefty cut, people turned to the underground market or the hawala network to initiate transfers. Pakistan lost out and couldn’t build its forex reserves.

So yeah, the situation just keeps getting worse and worse. And unless Paksitan finds a miracle cure to increase its revenue and cut expenses, coming out of the mess is hard. And the only way out is to actually keep borrowing more and more money. From the big daddy of bailouts — the IMF.

Now the IMF’s loans come with strings attached too. And in Pakistan’s case, there are a lot of strings. Because since 1950, Pakistan has turned to this organization at least 23 times for funding. To reinvigorate its flailing economy. But it’s never been that successful. It’s only fair that the IMF is circumspect. Apparently, they’d even asked Pakistan to set up an anti-corruption body to dig into government corruption if they want the loan.

Now Pakistan is doing all it can to meet the IMF’s conditions. Last week, they even created a mini-budget to convince the IMF that it was dead serious about getting its house in order. It proposed increasing GST. It’ll make everything including ghee, tobacco products, and fuel expensive. It’ll hurt the common people more. But Pakistan’s hands are tied. It has no choice. And it could even create more turmoil.

Turmoil that even India will be worried about. Because a failed state could mean bad news for all neighbours, including us.

Until then we will just have to wait and see how this all unfolds.

Until next time…

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